On Mylan N.V. (NGS: MYL) following a string of positive pipeline developments and ahead of the company’s merger with Upjohn, Pfizer’s off-patent branded and generic medicines business. While MYL stock has fallen sharply over the past few years due to a range of public relations, legal, and regulatory issues and, most recently, the COVID-19 pandemic, we believe it is poised for a rebound. Once the merger with Upjohn is completed in late 2020, the combined company should benefit from greater economies of scale, an extended geographic reach, and stronger negotiating power with payers. With the merger, Upjohn President Michael Goettler will become the new CEO and current Mylan CEO Heather Bresch will retire. We expect the change in leadership to boost investor confidence in the company given the issues that arose during Ms. Bresch’s tenure.
On July 6, it secured Indian regulatory approval for remdesivir (marketed in India under the brand name Desrem) for emergency use in COVID-19 patients. The Indian approval follows Mylan’s May 12 announcement of a nonexclusive agreement with Gilead Sciences to supply remdesivir in 127 lowand middle-income countries.
On August 12, Mylan and Sesame Workshop, the nonprofit educational organization behind Sesame Street, announced a partnership to provide support resources to families impacted by the COVID-19 pandemic. The company also continues to provide personal protective gear and financial support for food pantries in the communities in which it operates.
Mylan is preparing to merge with Upjohn, Pfizer’s off-patent branded and generic medicines business. Pfizer shareholders will own 57% of the combined company, which will be named Viatris, while Mylan shareholders, who approved the merger in a near-unanimous vote on June 30, 2020, will own 43%. Management believes that the combination will help to drive geographic expansion and broaden the company’s pipeline. Upjohn’s current president, Michael Goettler, will serve as CEO of the new company, while Heather Bresch, Mylan’s current CEO, will retire. Robert J. Courey, Mylan’s executive chairman, will maintain his current role on the board of the combined company. The new company will be domiciled in the U.S. and incorporated in Delaware. Mylan is currently domiciled in the Netherlands. We view the Upjohn merger as a positive for Mylan. While it could take time for the combined company to realize the full benefit of the merger, we expect that it will provide greater economies of scale, an extended geographic reach, stronger negotiating power with payers, and the potential for greater shareholder returns. Management also expects the deal to provide greater revenue stability. In recent merger news, the company received European Commission approval for the proposed combination on September 15 following the divestiture of certain products specified by the EC. Aside from approval in the U.S., the companies have now obtained all necessary regulatory approvals.
Mylan continues to advance its pipeline. On September 15, the company announced that the Technical Board of Appeal of the European Patent Office had invalidated a patent related to Teva’s Copaxone. The decision allowed Mylan to immediately return to the market and accelerate the commercialization of its therapeutically equivalent product in Europe. On August 31, Mylan and Biocon announced the launch of Semglee, an insulin glargine injection, in the U.S. Semglee was approved by the FDA in June, and is now available in both vial and pen forms. Biogen is appealing the decision. We note that U.S. Tecfidera sales totaled $3.8 billion for the 12 months ended June 30, 2020.
On July 9, Mylan and Fujifilm announced the FDA approval of Hulio, a biosimilar to AbbVie’s Humira, for the treatment of chronic inflammatory conditions. For reference, Humira had U.S. sales of nearly $15 billion for the 12 months ended December 2019. On June 4, the European Commission granted marketing authorization for Mylan and Lupin’s Nepexto, a biosimilar version of the anti-inflammatory biologic Enbrel. According to IQVIA, Enbrel had global sales of approximately $9.6 billion in the 12 months ending December 2019.
However, not all product news has been positive. On August 28, 2020, Mylan announced a voluntary nationwide recall of four lots of its Amiodarone HCI Injection and Tranexamic Acid Injection due to a carton label mix-up. While the vials themselves were labeled correctly, some were shipped in the wrong carton packaging. Earlier, on July 7, the company initiated a voluntary national recall of one lot of Daptomycin for Injection due to the presence of particulate matter found in one single-dose vial. While Mylan has not reported any adverse events related to this recall, the company noted that visible particles in an intravenously administered solution could lead to serious adverse effects.
In the second quarter, Mylan topped the consensus earnings estimate but missed on revenue. On August 6, the company reported 2Q20 adjusted EPS of $1.11. Revenue fell 4% as reported and 2% on a constant-currency basis to $2.73 billion, missing the consensus forecast by $9 million.
The company will report third-quarter results on November 9. The consensus earnings estimate is $1.17 per share and the consensus revenue estimate is $2.99 billion.
EARNINGS & GROWTH ANALYSIS
Mylan organizes its sales into four segments: North America (approximately 38% of 2Q20 revenues), Europe (34%), Rest of World (26%), and Other (1%).
Mylan’s North American revenue rose 2% year-over-year to $1.04 billion, primarily due to higher volumes of existing products and new product sales. These negatives were offset by new product sales. The decline reflected lower volumes and lower pricing on existing products, partly offset by new product sales.
It now expects total revenues of $11.5-$12.0 billion (flat to up 4% from the prior year), down at the high end from its earlier estimate of $11.5-$12.5 billion. The new guidance implies a decline of 7% to growth of 5% for the year. Management noted that its guidance now assumes a slower than initially anticipated recovery from the pandemic.
FINANCIAL STRENGTH & DIVIDEND
Assuming continued adjusted free cash flow generation, Mylan plans to repay $1.0 billion of its debt in 2020.
S&P revised its outlook to positive from developing in June 2020 based on the company’s continued deleveraging.
Mylan has not paid a dividend since 2007, but plans to initiate one following the Upjohn merger.
MANAGEMENT & RISKS
Heather Bresch currently serves as Mylan’s CEO, having held the role since 2012. Ms. Bresch has been with Mylan for 25 years and started out as a clerk in quality control. She will retire following the Upjohn merger and will be succeeded by Michael Goettler, the current president of Upjohn.
There are risks to owning MYL shares, including uncertainties related to competition, patent challenges, political opposition, unfavorable media coverage, and increased regulation.
To contain medical costs, governments, particularly in Europe, have moved to cut pricing and reimbursements for prescription medicines, including generics. We expect this trend to continue, though it may be offset in part by increased purchases of generics.
In addition to lawsuits related to the opioid crisis and its classification of the EpiPen as a generic product, Mylan faces lawsuits alleging price-fixing activity in the generic drug market. Most recently, on June 10, 2020, 51 state and local attorneys general filed a lawsuit accusing Mylan, among other generic drug makers, of artificially inflating the price of certain topical generic drugs.
While management has made numerous efforts to protect its employees, there is a risk that key personnel could contract the virus.
Mylan N.V. develops generic pharmaceutical products. The company also has a branded products division, which includes the EpiPen allergy treatment. It currently employs roughly 35,000 people worldwide, holds a growing portfolio of roughly 7,500 products across 10 therapeutic areas, and has a market cap of $8.0 billion.
Despite the stock’s long-term decline, as well as its more recent decline in response to the pandemic, the shares appears to have found an ascending floor, which continues to rise above its recent low of $14. Meanwhile, the stock has broken above a long-term downward-sloping line of resistance that dates back to 2018, clearing the way for further gains. With a relative strength index of 53, we believe that the MYL stock has sufficient room to advance before entering overbought territory.
The stock is also trading below historical average valuation multiples and at a discount to peers. While the stock has been hurt over the years by a range of regulatory and legal issues, and more recently by the pandemic, we believe that its latest pipeline and partnership successes warrant a higher valuation. We also believe in the long-term potential of Mylan’s pending merger with Upjohn, which we expect will provide greater economies of scale, an extended geographic reach, and stronger negotiating power with payers. While 2020 will likely prove to be a challenging year for the market as a whole, we believe that Mylan is well positioned to outperform over the next several quarters.